Question 4: What are some of the conditions from this acquisition that indicate the assets value may have been impaired? (Refer in your answer to the latest BHP Annual report for any discussion on the gas assets)

* Assets of $US3.3 billion were write-downs due to the ill-timed purchase of US shale gas fields last year by BHP. BHP has reportedly dropped a 22 per cent of underlying profits excluding impairments of $US16.9 billion. The company announced $US9.3 billion of impairments, primarily as a result of its disastrous acquisition of Alcan in 2007. There was a pre-tax charges announced of $US2.84 billion as an attributed to BHP’s ill-timed $US4.75 billion acquisition of Fayetteville dry shale gas assets in the US just before a plunge in the gas price. BHP did not take an impairment on its $US15.1 billion acquisition of shale gas producer Petrohawk Energy because better potential for liquids production since the deal was completed offset lower gas prices. Petrohawk lost $US55.4 million in the March quarter - worse than the $US29 million loss a year earlier - has only reinforced the market's expectation that an impairment will soon be levelled against the assets. The remaining $US450 million write-down was on BHP’s WA nickel division acquired through its purchase of WMC Resources in 2005. Some of other divisions for potential impairments of the BHP were aluminium division. BHP had US$2.84bn impairment charge against the value of its Fayetteville gas assets, which it acquired, form US$4.75bn 18 months ago. It will also take a US$450m impairment charge against the value of its Nickel West business in Western Australia due to margin deterioration.

Question 5: What assumptions need to be made when undertaking an impairment test, and what effect would theses have for evaluating the performance of BHP and its competitors? * The process of impairment test should be begun early. It is not an exercise or process that can be left to the last minute. Goodwill does not have to be tested for impairment at the end of the year. It can be tested earlier. But if any impairment indicator arises between the date of the test and the balance sheet date, the impairment assessment should be updated. IAS 36 and IAS 1 should be presentation in financial statements. There must be many disclosure requirements. Market regulators around the world have identified that some companies are not including all the required disclosures where requirements are extensive. Goodwill does not generate cash flows independently from other assets or groups of assets, so the recoverable amount of goodwill as an individual asset cannot be determined. Foreign currency cash flows are common and are required to be dealt with in a specific way during impairment test . The future cash flows are estimated in the currency in which they will be generated and then discounted at an appropriate rate for that currency. We have to make sure the cash flows being tested are consistent with the assets being tested. During impairment we must be consistency when including or excluding working capital from the CGU. We have to make sure that the forecast cash flows make allowance for investment in working capital if the business is expected to grow. The current economic climate assumptions is also important. Market capitalisation below net asset value is an explicit trigger for an impairment test; calculations of recoverable amount are required. If the market capitalisation is lower than a value-in-use calculation, a reasonable challenge to the appropriateness of the assumptions made is justified, as it is unusual for the value in use of an asset to significantly exceed the fair value less costs to sell. Watch out for illogical discount rates. Risk-free interest rates set by central banks are falling in many territories, but other factors affect discount rates in impairment calculations. These include corporate lending rates, cost of capital and risks associated with cash flows,